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    Overhead Cost Variances

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    In analysis of overhead cost variances, what is the controllable variance and what causes it?

    © BrainMass Inc. brainmass.com October 7, 2022, 9:43 am ad1c9bdddf
    https://brainmass.com/business/accounting/overhead-cost-variances-361027

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    Problem: In analysis of overhead cost variances, what is the controllable variance and what causes it?

    Solution:
    Controllable overhead variance is the difference between the actual overhead incurred and the budgeted overhead allowed for actual production. The variance over which the managers of the department can exercise control is called controllable variance.
    The controllable variance can be explained by a example.
    Example:
    Actual TOTAL overhead incurred by the company A during May.2011 is $ 100000.
    Actual output: 1000 units
    Standard hours allowed for actual output: 4 per unit.
    Variable overhead rate is $20 per unit.
    Budgeted fixed overhead for the month of May, 2011 is $40000.
    Controllable variance: Actual overhead - (Budgeted fixed overhead+ variable overhead rate per unit*standard hours allowed for one unit*actual output)
    Here, $100000-($40000+ ($20*4*1000))
    $100000-($40000+$80000)
    $100000-$120000
    =-$20000 Favorable. Because actual overhead of $100000 is lesser than the budgeted overhead.
    Now, let us see the reasons for the controllable variance.
    1. Indirect material cost will be more or less than the budgeted indirect material cost which will result in controllable variance. If the manager is inefficient, then he might have got the material at a higher rate than the budgeted which will result in high actual overhead than the budgeted overhead which will result in unfavorable controllable variance.
    2. The indirect labor cost i.e., rate of wages paid to the supervisor is more than the budgeted, and then it will result in unfavorable controllable variance. If the actual wage rate is lesser than the budgeted, then it will result in favorable controllable variance.
    3. If the rent of the factory building or any other item of fixed overhead is more than the budgeted amount, then it will result in unfavorable controllable variance and vice versa.
    4. If more quantity of indirect material is consumed than the budgeted quantity then it will result in unfavorable controllable variance. If less quantity is consumed, then it will result in favorable controllable variance.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com October 7, 2022, 9:43 am ad1c9bdddf>
    https://brainmass.com/business/accounting/overhead-cost-variances-361027

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